International price discrimination for software

The Senate is currently looking at the differential between overseas and Australian prices for software. I have looked at international price discrimination before – but here are a few more thoughts.

1. Why are prices higher in Australia?

There seem to be three potential answers here. First, it could reflect cost differences. If costs of delivery to Australia, costs of retailing in Australia, costs of logistics in Australia, and so on, are higher than overseas, this would explain some price differentials. But this does not explain software that is downloaded over the Internet. The cost of sale to Australia is the same as delivery to anywhere else. After sales support is probably out of an office in India so that does not seem to explain price differences.

Second, international companies may be avoiding price changes. I have discussed this here for Apple – although as the commentators note in the blog, the differences in taxes explains the price difference pretty well. Also, if ‘price stability’ and expected exchange rate changes were the main factor we would expect to see Australia’s prices higher about as often as they are lower than overseas prices. It does not explain why Australia’s prices would be uniformly higher over time.

Third, price discrimination. If demand for the products in Australia is less sensitive to price increases than overseas demand then third degree price discrimination (or market segmentation) will lead to prices that are higher here than overseas. Of course, this raises the question of why demand is less sensitive in Australia. One reason that is sometimes put forward relates to arbitrage. The ‘tyranny of distance’ means that it might be more difficult for Australian consumers to duck across to a low price country to buy the goods than someone in Europe or the US. However, that also seems less relevant for software than, say, shoes. If I need an overseas IP address and an overseas credit card to get the ‘local’ overseas price, then it would seem just as hard for people in the US as for people in Australia to ‘arbitrage’ and buy in a low price country.

At the same time, price discrimination appears to be the best explanation. Why is Australian demand less sensitive to price may be unanswered, but it appears that the relevant software sellers believe it is true and so charge us more.

2. What can we do about it? There is no reason why Australian’s should just sit by and face the wrong side of international price discrimination. Parallel importing can help for physical goods if a reseller can buy enough overseas and resell in Australia. (I suggest a ‘freedom to buy’ law in the comments to a previous post.) Parallel importing can be difficult enough for physical goods, but is effectively impossible for software if we respect IP rights.

So for software, the answer may be via IP and copyright laws. If there are any IP or copyright requirements that limit the ability of an Australian to buy the product ‘overseas’ (say through Internet download) whether for own use or resale, these barriers should be removed.

Second, a company selling a software product in Australia through a subsidiary could be required to also make the product available to Australians through any other legitimate overseas source. In other words, if, say Adobe, chose to sell its software in Australia via the Internet, then it could do so. But it could not stop an Australian equivalently downloading it from any other legitimate overseas site. Of course this would require a legal change.

One result is that the company, like Adobe, might stop offering the product in Australia. So, the law could also be altered so if the company does not sell in Australia and refuses to allow Australians to buy from a legitimate overseas site, then a ‘use it or lose it’ requirement kicks in and any person can buy the product from a legitimate source overseas and resell in Australia without any IP or copyright violation.

These solutions would need some legal changes but I for one cannot see why an Australian (or anyone else) should be stopped from buying a legitimate piece of software from any legitimate site anywhere in the world. To the companies – hey guys, welcome to the border-less world of the Internet!

11 Responses to "International price discrimination for software"

But of your three possibilities, the first just explains price discrimination for digital goods, the second (US exceptionalism) doesn’t explain why, for other products, prices are lower in the UK than Australia, and the third would potentially be illegal (e.g. the Universal music case) and doesn’t explain the price difference in physical goods (only Australian sellers play that game?). That said, we seem to get to a similar solution for digital goods.

There is an exemption in the Copyright Act 1968 for businesses wishing to parallel import overseas copies of software that are embedded on an ‘article’ (i.e. floppy disk, CD or DVD), (see s.44E).

But the same does not apply to digital downloads, and I am not sure it is a copyright issue per se. Yes, we could create an exemption in the Act for those who wish to retail overseas software in Australia, but most of the time, digital software is coming directly from the original publisher (Adobe, or Apple in the case of music). If those publishers charge differently for licence keys to people in different geographic areas, I don’t see how allowing parallel importation will change that. Other software vendors can’t supply the licence keys (or if they can, it will be because Adobe et al is charging differently in different areas).

And….maybe I am missing something here, but I always thought that price discrimination wasn’t an efficiency loss per se, but rather a transfer of value from consumers to producers? Total welfare is the sum of producer and consumer surplus, and price discrimination occurs under a set of conditions where producers can ‘grab’ a bit extra. Of course, if you only care about the welfare of Australians (legitimate policy position), then yes – anything that transfers value from Australian consumers to US producers is a loss of surplus for Australia. Australia is a big net importer of IP.

But does this international price discrimination cause efficiency losses over an above the losses created by the monopoly protection all IP laws afford? Is there some ‘extra’ loss here I’m not picking up, that isn’t just a transfer?

Price discrimination is not efficient in general, it is only unambiguously efficient in a particular case – when the alternative would be a single price that is higher than the low price under discrimination. And yes, even if this were true here, as a matter of policy we care less about overseas consumers. I don’t quite understand Joshua’s second possibility. Protecting your larger market segment that has a lower price by charging higher prices elsewhere? It sounds like an equivalent way of saying, you charge a higher price elsewhere because, well, you can (ie. there’s no resale from the low price market). In any case, it is equally explained by what it essentially amounts to – differences in each country’s consumers’ price sensitivity. And different prices means price discrimination (and the Apple exception is that their prices are nowhere near the price sensitive consumers in ANY country?). Joshua’s first possibility about piracy reinforces this. The third possibility is surely an added factor, and I would say particularly in relation to physical goods. Remember the recent reports of fashion retailers politely asking their suppliers to stop selling direct to Australian consumers? Moreover, there are a range of goods that Amazon can’t ship to an Australian address due to “manufacturer restrictions” (my conjecture is that their local exclusive distributor would not like it). It would be interesting to know whether this occurs more among Australian distributors than in other countries. Perhaps it is also related to consumers being less price sensitive, making exclusive distribution more profitable and easier to implement?

I think you would have a bit of trouble trying to force foreign companies to sell in Australia.

…if the company does not sell in Australia and refuses to allow Australians to buy from a legitimate overseas site, then a ‘use it or lose it’ requirement kicks in and any person can buy the product from a legitimate source overseas and resell in Australia without any IP or copyright violation.

” … anything that transfers value from Australian consumers to US producers is a loss of surplus for Australia. Australia is a big net importer of IP.”

Something that needs repeating over and over. Whatever the GLOBAL costs and benefits of a given IP regime, countries that are net exporters of IP gain from restrictive regimes and countries that are net importers lose from them. If I was the Chinese government, for example, I would be positively encouraging software piracy.

Isn’t it intereseting that when country-based price discrimination hurts Aussie consumers we tolerate it – indeed in some industries (eg books) legally mandate it. But when it helps us we denounce it as “dumping” and put legal sanctions on it.

Stephen on July 6th, 2012 11:52 am:
Tony – basically if they don’t sell they lose any Australian IP. Any hacker can break their software and resell in Australia (‘lose it or lose it’ is a polite way of saying this!)

Good luck with that! You’d have to apply the requirement to Australian rights holders too, or we would likely breach the Berne Convention’s National Treatment requirements (can’t discriminate between rights holders on the basis of their nationality’).

The PC looked at these sorts of issues in its 2009 Parallel Importation of Books study.